Under investor pressure, Hertz names new CEO

Car rental company Hertz has named longtime airline industry executive John Tague as its next CEO.

Tague replaces Mark Frissora, who stepped down from the job in September amid accounting errors and the company’s disappointing financial performance.

Tague was backed by Hertz investor Carl Icahn, according to CNBC. Icahn, who holds an 8.5% stake in Hertz HTZ and previously called for the ouster of his predecessor.

“I am happy to say that after listening to John’s ideas concerning Hertz and evaluating what he has accomplished at United, I believe he ranks at or near the top of the group.” he said on Twitter.

Before of being names CEO of Hertz, Tague served as president and COO of United Airlines UAL.

“I am honored to have been selected to lead Hertz to its full potential at a time of unprecedented opportunity for the Company and industry,” Tague said in a statement. “I look forward to partnering with Hertz employees as we work to earn sustained industry leadership for the benefit of our shareholders, customers and team.”

But hedge funds and analysts may not be keen on the decision, according to reports. Some were pushing for ex-Dollar Thrifty head Scott Thompson to take over. Meanwhile, Jana Partners said it may call for changes in Hertz’s board if unhappy with the CEO choice.

Uncle Sam strikes a deal with Zipcar, other rental companies

The U.S. General Services Administration announced today that it is launching a pilot program, contracting with four different car rental companies to provide cars for short-term use by employees who currently use one of the 200,000 cars owned by the GSA.

The four companies under contract are Enterprise CarShare, Hertz HTZ, Zipcar and Carpingo. This will be an option for federal government employees in Washington, D.C., New York City, Boston, and Chicago.

The GSA will allow employees to rent these cars on an hourly basis for time frames not to exceed one day. The initial pilot program will last one year.

The agency will see if the pilot program proves to be more cost-effective than maintaining the current vehicle fleet, or using other methods o transportation.

“These pilots will tell us whether it is more cost-effective and beneficial to use a car-sharing service in lieu of taxi cabs, renting, leasing and/or purchasing a vehicle,” said GSA Federal Acquisition Services Commissioner Tom Sharpe. “That information will be a great step forward to reducing costs and the federal fleet over time.”

Enterprise noted in a statement that the company has worked with the GSA before this, winning the first GSA contract in the rental industry in 2006, to provide supplemental vehicles.

Zipcar has also worked with the GSA before, said president Kaye Ceille. That was another pilot program in some cities in 2011.

Ceille guessed that if the GSA could cut their fleet by even 1-3%, the total savings could be between $10 and $20 million.

Hertz CEO steps down amid investor pressure

Hertz on Monday said Chief Executive Mark Frissora has stepped down for “personal reasons,” a move that comes as the car-rental company has faced criticism from investors as well as an accounting snafu that found errors in three years of financial statements.

Frissora, who first joined Hertz in 2006, is being succeeded by Brian P. MacDonald, president and CEO of the company’s equipment rental business, on an interim basis while the board begins a search process to identify a permanent replacement. Internal and external candidates are being considered, Hertz HTZ said.

Frissora’s exit comes at a time when criticism was ramping up among some high-profile investors. Carl Icahn disclosed a 8.5% stake in the company last month, saying shares were undervalued and expressing a lack of confidence in management. At the time, a New York City hedge fund called Fir Tree Partners issued a statement calling for the removal of Frissora, The Wall Street Journal reported. Fir Tree Partners owns about 3% of Hertz’s shares outstanding.

Hertz already saw the company’s CFO Elyse Douglas step down last year, and other members of the company’s financial team have also left their posts in recent months. The company has been mired by accounting woes that led the company to conclude that its 2011 financial statements could no longer be relied on, and also warning it would need to correct the 2012 and 2013 statements to reflect those errors.

Hertz also warned last month that results for 2014 would be “well below the low end” of its previously stated guidance, citing operational challenges in the rental car and equipment segments as well as the associated costs related to the accounting review. The company also withdrew its financial estimates.

All of the woes have led to a drastically underperforming stock performance of late. Hertz’s shares are roughly flat so far this year, while major peer Avis Budget’s CAR stock has climbed more than 60% in 2014.

Hertz delays quarterly earnings as it undergoes accounting review

Hertz Global Holdings has warned it will delay the filing of its second-quarter results, as the car-rental company continues to work through an accounting review that found errors in three years of financial statements.

In a filing with the Securities and Exchange Commission, Hertz said it was “unable to timely file” its quarterly results, citing an ongoing internal review of financial records and its potential impact on the company’s 2014 results. Hertz said it was unable to complete the report by the Aug. 11 due date without “undue effort and expense.” The filing was signed by Hertz’s new CFO Thomas Kennedy.

Hertz HTZ first noticed errors earlier this year when it was preparing its first quarter results, which also resulted in a delayed 10-Q filing with the SEC. The company concluded its 2011 financial statements could no longer be relied on, and also needs to correct the 2012 and 2013 statements to reflect those errors. Those issues led Hertz to suspend an employee stock-purchase program and could also affect the timing of Hertz’s planned spin-off of its equipment-leasing business.

Putting aside the accounting woes, Hertz and other car-rental companies have performed well of late, benefiting from a pickup in business and leisure travel in recent years. Recent consolidation in the U.S. has left just three major players, giving the firms greater pricing power. Peer Avis Budget Group CARearlier this month reported a 10% jump in second-quarter revenue, with pricing in North America climbing 4% excluding a recent acquisition. The third major player, Enterprise Holdings, is privately held.

Hertz suspends employee stock-purchase program

Hertz Global Holdings has suspended an employee stock-purchase program in the wake of an accounting review that found errors in three years of financial statements.

The car-rental company informed employees enrolled in the program that their participation must be postponed “in light of the accounting matters facing the company,” according to an internal memo seen by Fortune.

Hertz HTZ intends to refund any deductions withheld as of April 1 this year, as well as any residual contributions from the prior period. No deductions will be withheld from employee paychecks during the quarterly purchase period that begins July 1 “until further notice,” the memo said.

Hertz first noticed errors earlier this year when it was preparing its first quarter results, which resulted in a delayed 10-Q filing with the Securities and Exchange Commission. The company has concluded its 2011 financial statements can no longer be relied on, and also needs to correct the 2012 and 2013 statements to reflect those errors. The varying accounting issues could affect the timing of Hertz’s planned spin-off of its equipment-leasing business.

“This accounting review has no impact on Hertz’s business, which remains sound,” a Hertz representative said in a statement on Wednesday. “The company is putting all of the necessary resources and efforts toward getting this matter resolved. While it will take time to complete this process, we are making progress.”

An employee-stock purchase program is a type of broad-based stock plan that allows employees to buy their company’s shares at a reduced price. Typically the program’s discount is up to 15%.

The suspension of Hertz’s employee stock-purchase program affects less than 10% of the company’s U.S.-based employees. Hertz employed about 22,800 in the U.S. at the end of 2013.

The finance team at Hertz has been undergoing significant changes since former Chief Financial Officer Elyse Douglas stepped down from the role last year. Hertz has said new CFO Thomas Kennedy is spearheading an effort to rebuild the financial team. A Hertz representative on Wednesday said the company was in the process of implementing new procedures and controls, as well as adding new personnel to the accounting and finance departments.

Hertz’s accounting problems are worse than you think

Hertz Global Holdings HTZ has disclosed it must restate three years of financial statements due to varying accounting issues, an action that could affect the timing of the company’s planned spin off of its equipment-leasing business.

The car-rental company first noticed errors earlier this year when it was preparing its first quarter results, which resulted in a delayed 10-Q filing with the Securities and Exchange Commission. Hertz’s audit committee has concluded the company’s 2011 financial statements can no longer be relied on, and also needs to correct the 2012 and 2013 statements to reflect those errors.

Because of those errors, the committee has also directed Hertz to thoroughly review the financial records for all three years, which could result in further adjustments to the 2012 and 2013 financial statements. The company also cancelled a conference call it intended to host on Monday.

The disclosure, made in a SEC filing, comes as Hertz is in the midst of building a new financial team. The finance team has been undergoing changes since former CFO Elyse Douglas stepped down from the role last year. Douglas left that role as she didn’t want to relocate to Florida, where Hertz was moving its headquarters from the New York City metropolitan area.

Since Douglas stepped down, senior vice president and corporate controller Jatindar Kapur has also resigned. Hertz has said new CFO Thomas Kennedy is spearheading an effort to rebuild the financial team.

“Hertz is in the process of implementing new procedures and controls, and strengthening the accounting and finance departments through the addition of new personnel,” the company said.

Mr. Kennedy joined Hertz in late 2013, after serving as CFO at Hilton Worldwide HLT since 2008.

Operationally, Hertz and rivals Avis Budget Group CAR and privately held Enterprise Holdings have reported stronger sales in recent years, benefiting from a pickup in travel from leisure and business customers since the end of the recession. Hertz completed an acquisition of smaller peer Dollar Thrifty in 2012, but is planning to streamline its focus on car rentals after it completes a spin off of its equipment-leasing business.

Hertz, which is still reviewing its first-quarter results, preliminarily expects those results will fall short of Wall Street’s expectations. The company said preliminary results indicate rental-car revenue increased in the U.S. and abroad during the first quarter, though excess fleet and the timing of the late Easter holiday hurt per-day rental-car revenue in the U.S.

Plenty of pitfalls in potential Hertz deal

The markets fervently applauded the $2.3 billion merger announcement between car rental giants Hertz and Dollar Thrifty on Monday, giving both companies a healthy bump in shareholder value. But while the merger looks promising on many levels, it is hardly a done deal. Hertz still needs the approval of government regulators as well as Dollar shareholders to make it happen, two things the market shouldn’t take for granted. And even if the deal goes through, it is still unclear how Hertz plans to achieve the revenue synergies needed to justify the hefty premium it will have paid.

In order to understand this deal we need to take a look back in time. The car rental business in the US has changed dramatically in the last decade. What used to be a diverse set of small companies fighting it out for market share and counter space at the local airport has become very concentrated. In the last few years National bought Alamo, Avis merged with Budget, Thrifty hooked up with Dollar DTG and Hertz acquired Advantage. Then in 2007, Enterprise Rent-A-Car acquired the combined National/Alamo fleet, making it the largest car rental company in the US.

By the end of the last decade the number of major car rental companies in the US had gone from about nine to just four: Hertz, Avis/Budget, Enterprise and Dollar/Thrifty. Together, the four car companies controlled 87% of the US car rental market. But the public remained mostly oblivious of the car rental oligopoly as the companies retained their old brand names, giving the illusion of choice when in fact there was very little. But despite their strong market power, rental car pricing still came under pressure during the 2008 recession. While none of the companies faced bankruptcy, profits were severely curtailed across the board as both the business and leisure traveler stayed off the road.

Seeing an opportunity to expand during the dip, Hertz decided to move in on its smaller rival, Dollar Thrifty. The rationale behind the deal was to ostensibly diversify Hertz’s client base beyond its core customer: the business traveler. The story was that a combination with Dollar, whose customers were mainly leisure travelers, would allow the company to utilize its extensive fleet in a more efficient way as it could rent cars on the weekends when business travelers go home and leisure travelers take to the roads.

After a few months of negotiations, Dollar agreed to be acquired by Hertz (for the first time) in April 2010 for $41 a share or $1.2 billion. Fearing a lost opportunity, rival Avis Budget decided to make a higher, unsolicited offer for Dollar for around $1.3 billion. A bidding war between Hertz and Avis commenced, but Dollar’s board seemed set on doing a deal with Hertz, even though Avis consistently outbid its rival. Dollar justified its position saying that while Avis’s bid may be higher, it feared that any deal with Avis would be blocked on anti-trust grounds.

Dollar Thrifty shareholders felt they were being short-changed and that anti-trust concerns was just as much, if not more, of an issue with Hertz as it was with Avis. Shareholders ended up voting down Hertz’s first offer, sending the whole process back to the drawing board. The move showed that Dollar’s shareholders were a force to be reckoned with and that their support shouldn’t be taken for granted. There is talk that major Dollar shareholders were consulted on the price before the latest offer was announced, but it is unclear if they were happy with the numbers. If not, they could end up derailing the merger yet again.

But even if the price is right, the deal still has to get past government regulators. Given that anti-trust was a major issue to shareholders the first time around, it was widely believed that a new deal wouldn’t be announced until after the government issued its opinion. But the tedious government review process, which began all the way back in 2010, is still ongoing, raising questions as to Hertz’s motives.

It is hard to see how all could be fine on the regulatory front given how big the company’s footprint would be after the deal is consummated. Hertz has tried to downplay the market share argument, saying that the combined company would make up just 23% of the U.S. car rental market, while its next biggest competitor, Enterprise, would have around 51%. While that is true, it distorts the picture somewhat as it counts car rentals both on- and off-airport. It is at the airport where the big firms make most of their money as they can charge customers double the going rate off-airport. So if one strips out off-airport locations, Enterprise falls to 36% while the Hertz and Dollar deal would command around 38% of the of the rental market, which is sure to raise alarm bells in Washington.

Regulators will usually approve mergers if it leaves three or four competitors in a local market, but they start to show grave concern when it gets down to two. Given the limited competition already in the car rental market, there are several local markets where a Hertz and Dollar/Thrifty merger would lead to just such a scenario.

Nevertheless, Hertz tried to instill confidence in the deal yesterday by announcing the sale of its leisure-focused Advantage subsidiary. At the same time, the company said it is prepared to make other concessions to get the deal past regulators, but stopped short of saying what those concessions could be and how much revenue it could cost the combined company. But it should be noted that while jettisoning Advantage seems like a big concession, it really isn’t. Advantage on its own makes up less that 1% of the domestic car rental market, so its loss doesn’t move the needle much. Hertz apparently sold the business for a piddling $16 million, according to Bloomberg News, which means that the business wasn’t worth that much anyway.

But even if the government approves the merger, Hertz may be asked to divest some of its operations or make accommodations to level the playing field for regional car rental companies. This could get very expensive on many levels. If the government plays hardball, Hertz could be asked to make concessions that in the long run could far outweigh the $160 million in annual cost synergies that the company claims it can squeeze out of a tie-up. It would also decrease any revenue synergies that both Hertz and the market believe could be in the cards.

The question still remains as to whether or not the company could achieve meaningful revenue synergies to account for the premium Hertz just paid to absorb Dollar Thrifty. Part of that rests on the future of the car rental business. The last few years have been great, with double-digit percentage increases in revenue, but that could be coming to a swift end as the economy stalls. Dollar Thrifty reported flat revenue growth for the second quarter of this year compared with the same time last year after posting several strong quarters of growth. It actually made its numbers by slashing costs to the bone.

Also impacting future revenues is the recent dip in used car prices. Last month was the first month in three years that used car prices reported a decrease in value from the same time last year. That’s important because rental car companies are a slave to the used car market as they constantly turnover cars. In fact a 1% move in used prices impacts the pretax profit of rental car companies by 10%, according to Morgan Stanley. The decline in used car values is expected to continue through the year, which will make it that much harder for Hertz to justify this deal – that’s, of course, if it ever actually gets done.

With so many unknowns it is no wonder that the deal has an extremely liberal merger agreement. Dollar reportedly has 30 days to freely entertain other bids and could walk away from the deal at any time without paying a breakup fee if it receives a higher offer. This means that Hertz and Dollar Thrifty are either super confident that the deal will get done or are so unsure that they built an escape hatch. Either way, Hertz will have a lot of explaining to do in the next few months if it intends on keeping the recent pop in its stock.

Update: An earlier version of this story incorrectly stated that Enterprise held 35% of the U.S. car rental market. It holds around 51% in total, and 36% in the off-airport market. The story also said Dollar could walk away from the deal at any time without paying a breakup fee. According to Hertz, Dollar can only walk away without paying a fee if it receives a higher offer. The story has been updated to reflect these changes.